Tuesday, August 31

...with his face covered in flour and says, "Look mami, I'm a white boy!" His mother takes one look at him and slaps him across the face. She replies, "Go show your father what you have done!"

So the little boy runs to the other room where his father is and shouts, "Papi look! I'm a white boy!" Just as the mother did, the father slaps him across the face and says, "Go show your grandmother what you have done, maybe she can knock some sense into you."

The little boy runs out to the garden where his grandmother is and says, "Grandma, look! I'm a white boy!" His grandmother slaps him across the face, grabs him by the ear and sits him on the floor. She gives him a long speech about why he should be proud to be Mexican and why he shouldn't try to ever cover up his true identity.

The boy then slowly walks back into the kitchen, past his mother. She asks him, "So, what did you learn?" The boy replies, "I've only been white for 10 minutes and I already hate you people."

Tuesday, August 24

Welcome to Berkeley, probably still the best public university in the world. Meet your classmates, the best group of partners you can find anywhere. The percentages for grades on exams, papers, etc. in my courses always add up to 110% because that’s what I’ve learned to expect from you, over twenty years in the best job in the world.

That’s the good news. The bad news is that you have been the victims of a terrible swindle, denied an inheritance you deserve by contract and by your merits. And you aren’t the only ones; victims of this ripoff include the students who were on your left and on your right in high school but didn’t get into Cal, a whole generation stiffed by mine. This letter is an apology, and more usefully, perhaps a signal to start demanding what’s been taken from you so you can pass it on with interest.

Swindle – what happened? Well, before you were born, Californians now dead or in nursing homes made a remarkable deal with the future. (Not from California? Keep reading, lots of this applies to you, with variations.) They agreed to invest money they could have spent on bigger houses, vacations, clothes, and cars into the world’s greatest educational system, and into building and operating water systems, roads, parks, and other public facilities, an infrastructure that was the envy of the world. They didn’t get everything right: too much highway and not enough public transportation. But they did a pretty good job.

Young people who enjoyed these ‘loans’ grew up smarter, healthier, and richer than they otherwise would have, and understood that they were supposed to “pay it forward” to future generations, for example by keeping the educational system staffed with lots of dedicated, well-trained teachers, in good buildings and in small classes, with college counselors and up-to-date books. California schools had physical education, art for everyone, music and theater, buildings that looked as though people cared about them, modern languages and ancient languages, advanced science courses with labs where the equipment worked, and more. They were the envy of the world, and they paid off better than Microsoft stock. Same with our parks, coastal zone protection, and social services.

This deal held until about thirty years ago, when for a variety of reasons, California voters realized that while they had done very well from the existing contract, they could do even better by walking away from their obligations and spending what they had inherited on themselves. “My kids are finished with school; why should I pay taxes for someone else’s? Posterity never did anything for me!” An army of fake ‘leaders’ sprang up to pull the moral and fiscal wool over their eyes, and again and again, your parents and their parents lashed out at government (as though there were something else that could replace it) with tax limits, term limits, safe districts, throw-away-the-key imprisonment no matter the cost, smoke-and-mirrors budgeting, and a rule never to use the words taxes and services in the same paragraph.

Now, your infrastructure is falling to pieces under your feet, and as citizens you are responsible for crudities like closing parks, and inhumanities like closing battered women’s shelters. It’s outrageous, inexcusable, that you can’t get into the courses you need, but much worse that Oakland police have stopped taking 911 calls for burglaries and runaway children. If you read what your elected officials say about the state today, you’ll see things like “California can’t afford” this or that basic government function, and that “we need to make hard choices” to shut down one or another public service, or starve it even more (like your university). Can’t afford? The budget deficit that’s paralyzing Sacramento is about $500 per person; add another $500 to get back to a public sector we don’t have to be ashamed of, and our average income is almost forty times that. Of course we can afford a government that actually works: the fact is that your parents have simply chosen not to have it.

I’m writing this to you because you are the victims of this enormous cheat (though your children will be even worse off if you don’t take charge of this ship and steer it). Your education was trashed as California fell to the bottom of US states in school spending, and the art classes, AP courses, physical education, working toilets, and teaching generally went by the board. Every year I come upon more and more of you who have obviously never had the chance to learn to write plain, clear, English. Every year, fewer and fewer of you read newspapers, speak a foreign language, understand the basics of how government and business actually work, or have the energy to push back intellectually against me or against each other. Or know enough about history, literature, and science to do it effectively! You spent your school years with teachers paid less and less, trained worse and worse, loaded up with more and more mindless administrative duties, and given less and less real support from administrators and staff.

Many of your parents took a hike as well, somehow getting the idea that the schools had taken over their duties to keep you learning, or so beat-up working two jobs each and commuting two hours a day to put food on the table that they couldn’t be there for you. A quarter of your classmates didn’t finish high school, discouraged and defeated; but they didn’t leave the planet, even if you don’t run into them in the gated community you will be tempted to hide out in. They have to eat just like you, and they aren’t equipped to do their share of the work, so you will have to support them.

You need to have a very tough talk with your parents, who are still voting; you can’t save your children by yourselves. Equally important, you need to start talking to each other. It’s not fair, and you have every reason (except a good one) to keep what you can for yourselves with another couple of decades of mean-spirited tax-cutting and public sector decline. You’re my heroes just for surviving what we put you through and making it into my classroom, but I’m asking for more: you can be better than my generation. Take back your state for your kids and start the contract again. There are lots of places you can start, for example, building a transportation system that won’t enslave you for two decades as their chauffeur, instead of raising fares and cutting routes in a deadly helix of mediocrity. Lots. Get to work. See you in class!

Naturally I agree that California is an ungovernable mess, broken by a referendum system that allows simultaneous popular demand for services and lower taxes.

Rather than raising taxes, I would like to see California's public sector spending pared down to the level of (let's say) Texas. Important services like Oakland's 911 could be re-funded if we cut enough handouts and nonessential services from elsewhere.

Professor O'Hare complains of teachers' "mindless administrative duties" and insufficient support from real school administrators and staff. But why not just do away with half these administrative demands? Let's spend less money on education and administration; get the government out of the business of directly employing teachers and administrators. Privatize everything with charter schools and vouchers, allowing families to choose the schools they consider best. You know, a market in choice and competition rather than this state-run bureaucratic nightmare with a monopoly on public funds and unionized teachers who can't be fired for poor performance.

Sunday, August 22

We'll never get a rational mortgage system until the government's affordable housing mandates are ended.

By EDWARD PINTO

Today the Obama administration will begin a discussion on how to overhaul our nationalized housing finance system. Moderated by Treasury Secretary Timothy Geithner and Shaun Donovan, secretary of the Department of Housing and Urban Development (HUD), the "Conference on the Future of Housing Finance" seeks answers to what went wrong in the U.S. housing market. This promises to be the next big domestic policy debate—one that could mold housing finance for a generation or more. But the early signs of where policy makers might be headed are not promising.

A consensus is building around a three-part grand bargain:

• An explicit federal guarantee of a large portion of the mortgage-backed securities created to finance American's home mortgages;

• A tax on these securities to fund low-income housing initiatives; and

This is a dead end for two reasons. First, while supporters of an explicit federal guarantee tell us it will never be called upon, Americans have read this book before and know how it ends.

The second is much less well known but equally deadly: the central role in the recent real estate collapse that was played by the federal affordable housing policy created by Congress and implemented since the 1990s by HUD and banking regulators.

In 1991, the Senate Committee on Banking, Housing, and Urban Affairs was advised by community groups such as Acorn that "Lenders will respond to the most conservative standards unless [Fannie Mae and Freddie Mac] are aggressive and convincing in their efforts to expand historically narrow underwriting."

Congress made this advice the law of the land when it passed the inaptly named Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (GSE Act of 1992). This law imposed affordable housing mandates on Fannie Mae and Freddie Mac.

Thus, beginning in 1993, regulators started to abandon the common sense underwriting principles of adequate down payments, good credit, and an ability to handle the mortgage debt. Substituted were liberalized lending standards that led to an unprecedented number of no down payment, minimal down payment and other weak loans, and a housing finance system ill-prepared to absorb the shock of declining prices.

In 1995, HUD announced a National Homeownership Strategy built upon the liberalization of underwriting standards nationally. It entered into a partnership with most of the private mortgage industry, announcing that "Lending institutions, secondary market investors, mortgage insurers, and other members of the partnership [including Countrywide] should work collaboratively to reduce homebuyer downpayment requirements."

The upshot? In 1990, one in 200 home purchase loans (all government insured) had a down payment of less than or equal to 3%. By 2006 an estimated 30% of all home buyers put no money down.

"[T]he financial crisis was triggered by a reckless departure from tried and true, common-sense loan underwriting practices," Sheila Bair, chair of the Federal Deposit Insurance Corporation, noted this June. One needs to look no further than HUD's affordable housing policies for the source of this "reckless departure." If the mortgage finance industry hadn't been forced to abandon traditional underwriting standards on behalf of an affordable housing policy, the mortgage meltdown and taxpayer bailouts would not have occurred.

Compounding HUD's forced abandonment of underwriting standards was a not-unrelated move to increased leverage by financial institutions and securities issuers. They were endeavoring to compete with Fannie and Freddie's minimal capital requirements. The GSEs only needed $900 in capital behind a $200,000 mortgage—many of which had no borrower down payment. Lack of skin in the game promoted systemic risk on both Main Street and Wall Street.

How should we go about repairing this dysfunctional housing finance system?

The goals should be larger down payments, stricter underwriting standards, reliance on the private sector and private capital, and the removal of affordable housing mandates. If there is to be an affordable housing policy, it should not be implemented by hidden subsidies and loose lending standards, but instead made transparent and funded on budget by the government.

Getting there will take time—probably a 15-year rebuild that fosters an orderly phase-out of government guarantees and a transition to a deleveraged, market-based system. This will require both long- and short-term policies.

Long-term we should consider ideas such as: the proposal by Columbia University's Charles Calomiris to increase minimum down payments by 1% per year over 15 years, bringing them back to 20%, where they had been for decades. Peter Wallison of the American Enterprise Institute has suggested that the private sector be encouraged to grow by reducing the GSEs' maximum mortgage amount by a percentage every year until it matches the Federal Housing Administration's (FHA) reduced limit, at which point the GSEs disappear. I have suggested that the FHA be returned to its former role of serving the low-income market over a five-year period, but with a higher minimum down payment so borrowers have more skin in the game.

Finally, the property appraisal process should be re-engineered along the lines suggested by the Collateral Risk Network, an organization representing the nation's leading appraisal experts. The boom was promoted by appraisal practices that relied on one input—the latest prices that were the result of an overheated market. A return to traditional appraisal theory based on price trends, replacement cost and value as a rental is necessary.

To get the housing finance system out of intensive care, short-term policies need to be implemented that promote deleveraging. Perhaps some of the excess supply of foreclosed properties should be sold to buyers who agree to put 40% down and use the properties as rentals. Josh Rosner, managing director of the research firm Graham Fisher, has suggested that homeowners who voluntarily pay down a portion of the principal on their underwater mortgage receive a tax credit also applied to their mortgage principal. In return, they would forgo future tax deductions of their mortgage interest payments.

While the road to housing hell may have been paved by the government, the road back will be built by the private sector.

Mr. Pinto, a consultant to the mortgage finance industry, was executive vice president and chief credit officer at Fannie Mae in the late 1980s.

Tuesday, August 3

I am surprised this film, set in ancient Alexandria, has not occasioned more controversy. It is the most pro-science, pro-rationalist, anti-Christian movie I have seen -- ever. -- and it does not disguise the message in the slightest. The director and scriptwriter is Spanish and Chilean, namely Alejandro Amenábar. It offers a Voltairean portrait of Judaism, as an oppressed rabble, most of all responsible for the crime of having birthed Christianity. There are some not-so-subtle parallels shown between the early Christians and current Muslim terrorists.